Sainsbury s Annual Results 2017 PDF

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Live Well For Less

Annual Report and Financial Statements 2017

Performance highlights £29,112m Group sales (inc. VAT) up 12.7%

£581m

Underlying profit before tax down 1%

3,000 Food will always be at the heart of our business and we have completed our programme to improve the quality of 3,000 Sainsbury’s branded products. We have a strong and differentiated offer that gives our customers market leading choice, quality and value. Read more about our food business on page 15

-0.6%

Sainsbury’s like-for-like sales (inc. VAT, ex fuel)

£6bn

10.2p

We are one of the largest general merchandise and clothing retailers in the UK, offering customers awiderange of products across Sainsbury’s, Argosand Habitat.

Full-year dividend

Read more about our General Merchandise and Clothing business on page 18

21.8p

Underlying basic earnings per share

17.5p

Basic earnings per share

£503m

Statutory profit before tax

1.8m Financial Services are an important part of our business. Sainsbury’s Bank played a key part in ouracquisition of Argos and Habitat, enabling us tofinance the deal in an efficient way. Sainsbury’s Bank and Argos Financial Services each have 1.8m active customers. Read more about Sainsbury’s Bank and Argos Financial Services on page 21

8.8%

Return on capital employed down 4 bps Read more about our financial KPIs on page 40

£500m We are on track to reach our £500 million cost savings target by 2017/18 and benefit from a strong balance sheet. We plan to reduce costs by a further £500m over three years from 2018/19. Read more about our approach to managing costs and maintaining balance sheet strength on page 22

Strategic Report

Helping customers live well for less has been at the heart of what we do since 1869. We offer our customers great quality, choice and value and continue to make their lives better and easier every day. We sell over 90,000 products and employ around 195,000 colleagues across the UK and Ireland.

01

Strategic Report 01 02 04 06 08 10 15 18 20 22 24 40 42 46

Contents page Sainsbury’s Group at a glance Our business model Market context Chairman’s Letter Chief Executive’s Letter Priority #1: Further enhance our differentiated food proposition Priority #2: Grow General Merchandise & Clothing and deliver synergies Priority #3: Diversify and grow Sainsbury’s Bank Priority #4: Continue cost savings and maintain balance sheet strength Our values make us different Financial KPIs Our principal risks and uncertainties Financial review

Governance Report 54 56 58 64 66 68 74 78 88 95

Board of Directors Operating Board Corporate Governance Nomination Committee Corporate Responsibility and Sustainability Committee Audit Committee Annual Statement from the Remuneration Committee Chairman Annual Report on Remuneration Directors’ Remuneration Policy Additional statutory information

Financial Statements 100 Statement of Directors’ Responsibilities 101 Independent Auditor’s Report to the Members of J Sainsbury plc 106 Consolidated Financial Statements 111 Notes to the Consolidated Financial Statements 115 Income Statement 127 Financial Position 156 Cash Flows 159 Employee Remuneration 168 Additional Disclosures 179 Company Financial Statements 181 Notes to the Company Financial Statements 186 Additional shareholder information 190 Alternative performance measures 192 Glossary

Find out more at www.j-sainsbury.co.uk/ar17

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Strategic Report

Sainsbury’s Group at a glance Our vision is to be the most trusted retailer where people love to work and shop Our goal is to make our customers’ lives easier by offering great quality products and service at fair prices.

We offer customers choice across our wide range of food, general merchandise, clothing and financial services. On 2 September 2016 we acquired Home Retail Group plc, the owner of Argos and Habitat, creating one of the UK’s leading food, general merchandise and clothing retailers – a multi-product, multi-channel business with fast delivery networks. Sainsbury’s Bank offers accessible financial services products such as credit cards, insurance, travel money and personal loans that reward customer loyalty. Our 195,000 colleagues, strong culture and values are integral to achieving our vision and driving our success – now and in the future.

The new Sainsbury’s Group

Food Sainsbury’s has sold great quality food at fair prices since 1869. We have a strong heritage of innovation and were the first retailer of organic produce in the UK. We continue to build our strength in food innovation, targeting growing food markets where we can increase our market share, such as Food to Go and FreeFrom, where we can be a market leader.

125

reviews underway covering around 60% of our food ranges

26m+

weekly customer transactions See more on page 15

General Merchandise & Clothing Our General Merchandise and Clothing business is one of the biggest in the UK and offers customers a wide range of products across home, clothing, technology and leisure. We have a market-leading position in key product categories such as toys and electricals and our Tu clothing brand offers customers high street style at supermarket prices.

£6bn

of sales generated by Sainsbury’s General Merchandise and Clothing business, including Argos. See more on page 18

Financial Services Sainsbury’s Bank has 1.8m active customers. We offer accessible financial services products such as credit cards, insurance, travel money and personal loans that reward loyalty. This year Argos Financial Services became part of our financial services offer and also has approximately 1.8m active customers.

1.9m

visits to Sainsbury’s Bank website every month

1,728

ATMs in our estate See more on page 21

Strategic Report

Our supermarkets offer customers a comprehensive mix of food, general merchandise and clothing. Our smaller convenience stores are located where our customers live and work, with a product mix designed for regular top-up shopping and to meet their day-today needs.

The world is changing faster than at any time

We have a well-established and growing online offer that allows customers to shop from the comfort of their home, or on the go via a mobile phone or tablet, opting for either convenient delivery to their home or to Click & Collect from our stores.

Convenience, speed and flexibility are key in today’s retail environment. Our strategy is to sell products whenever and wherever customers want.

Our acquisition of Home Retail Group plc has accelerated our strategy. Customers now have access to Argos products, marketleading Argos digital channels and delivery systems. Argos’s unique Hub and Spoke supply chain network and Fast Track delivery and collection service are points of competitive advantage. Read more about our market context on page 6

Whenever and wherever

59

Argos Digital stores in Sainsbury’s supermarkets

11

26m+ weekly customer transactions

*All numbers are correct at the time of signing the Annual Report and Acounts.

Groceries Online Click & Collect points

Sainsbury’s supermarkets

Convenience stores

Habitat stores, including four standalone and seven Mini Habitats in Sainsbury’s

151

605

809

207

Digital Collection points for Tu clothing, eBay, DPD and, in 90 stores, Argos

276,000 Average number of customer orders made through Groceries Online channel per week

10%

of Groceries Online orders made through new app

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Strategic Report

How we create value and build customer loyalty

Our business model

We achieve this by listening to our customers and anticipating their needs. We deliver quality products and great value through multiple channels and are there for our customers whenever and wherever they want to shop.

Our business model is designed to create value for our shareholders, customers and colleagues, both now and in the future.

Our values make us different and underpin everything we do, from sourcing with integrity to helping our customers lead healthier lives and providing a great place to work. Our colleagues make the difference, anchoring us in our communities and connecting us to the lives of our customers, day in, day out.

Power of the Sainsbury’s Group We are one of the largest retailers of quality food, general merchandise, clothing and financial services in the UK and we believe people trust the Sainsbury’s brand. Customers can shop with us whenever and wherever they want and we have a logistics network that gives us market-leading product availability in-store and online.

Our values key A great place to work Respect for our environment Sourcing with integrity Living healthier lives Making a positive difference to our community

What makes us different

Supply chain

We are a multi-product, multi-channel business with a strong, differentiated food proposition and respected brands in Sainsbury’s, Sainsbury’s Bank, Argos and Habitat.

Our business is built on excellent, often long-standing relationships with our suppliers. We source Sainsbury’s branded products from the UK and over 70 other countries, according to the ability of suppliers to meet our regularly audited quality, safety and ethical standards. The investment we make in our farmer and grower Development Groups, R&D programme and Apprenticeship Scheme supports the British agricultural sector and encourages young talent into British farming. We are also the world’s largest retailer of fairly traded products.

We benefit from a structurally advantaged store estate, world-class property assets, an efficient supply chain and a market-leading digital presence with fast delivery networks.

Logistics

All this is underpinned by customer insights that enable us to adapt our business to customers’ changing lives.

We have invested in our logistics capability and capacity to ensure we can meet our customers’ requirements for flexible, convenient shopping now and in the future. Across Sainsbury’s and Argos we operate 34 distribution centres. They cover our store and online businesses, across food, general merchandise and clothing, making home and store deliveries seven days per week. Argos’s unique Hub and Spoke logistics network enables us to fulfil Fast Track same day deliveries – to a customer’s home or to a store for collection.

Channels Customer shopping habits are changing and our multi-channel proposition gives people the flexibility to shop with us whenever and wherever they want. We have over 2,200 supermarkets, convenience stores and Argos stores across the UK and Ireland and we have made it easy and convenient to shop on the go using our mobile apps. In fact, almost 20 per cent of Sainsbury’s Group sales now originate online. We have General Merchandise & Clothing businesses of scale and Sainsbury’s Bank is a growing, strategic part of our business.

Our values

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Strategic Report

Brand + Trust = Customer Loyalty

S i al

Logistics

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l ra ne n Ge a

d Me Cl r c h o t an hi n dis e g

Quality

Value

Service

Choice

Selling great quality food has been at the heart of our business since 1869. Customers value the wide range of products and services on offer when they shop with Sainsbury’s and this differentiates us. Most of our customers buy Sainsbury’s branded products, which account for around half of our food sales. We recently invested in the quality of 3,000 Sainsbury’s branded food lines and have moved on to the next stage of our quality improvement programme. Our passion for quality extends to everything we sell – food, general merchandise, clothing and financial services.

Offering great quality products and services at fair prices is part of our commitment to help our customers live well for less. Quality and price are both important in the value proposition and our regular lower prices reassure customers that they can always get good value at Sainsbury’s. We will always be competitive on price and will continue to invest in lowering prices and improving quality to ensure that we are well-positioned to meet the challenges of an increasingly competitive marketplace.

In shops, depots and store support centres, our colleagues provide award-winning service day in, day out, offering customers choice, flexibility and convenience whenever and wherever they want to shop with us. We employ around 195,000 colleagues who are the foundation of our business and make a real difference in the communities they serve. We take pride in the service we offer and our well-run shops and committed, well-trained colleagues have helped us win the Grocer Gold Awards for both Customer Service and Availability for the past four years.

We are one of the UK’s largest retailers, with over 90,000 products to choose from across food, general merchandise, clothing and financial services. Shopping for an evening meal, party dress, cookware or car insurance has never been easier at Sainsbury’s. Customers can choose between well-known food brands and our extensive own-brand differentiated food offer. In homeware, cookware and electrical products, customers now have an even wider choice of products, across Sainsbury’s, Argos and Habitat.

Sainsbury’s business model is supported through a structured approach to managing the business:

Governance Read more on page 58 Risk management Read more on page 42

Cost management Read more on page 22

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Strategic Report

Market context The market The UK economy has been stronger than anticipated since the European Union Referendum in June 2016. Conditions have remained supportive for UK consumers, with wage growth remaining higher than inflation. Consistent with recent years, the main beneficiaries of these conditions have been higher ticket discretionary categories such as eating out, car sales and holidays. However, the picture is changing now, as the impact of the devaluation of sterling and a higher oil price filter through to food, general merchandise, clothing and fuel prices and the gap between inflation and wage growth narrows. After more than two years of deflation, food and fuel prices started to rise towards the end of our financial year, driven by the devaluation of sterling and commodity price increases. While this has benefited food retail market growth, general merchandise and clothing sales growth have been impacted by reduced consumer confidence and a marked slowdown in real pay growth. Economic commentators are divided on the implications for the UK economy, but there are fears that this slowdown in real income might drive a reduction in GDP growth, an increase in unemployment and a reduction in the rate of unsecured credit growth.

Customer shopping habits and the UK retail landscape continue to change rapidly. Our strategy reflects this and our business is well set to continue adapting to changing customer needs.

UK average weekly earning growth vs inflation 4% 3% 2% 1% 0% -1% 2013

2014

Average weekly earnings 3m average

2015

2016

2017

2016

2017

Inflation

Source: ONS

BRC market growth and inflation 5% 4% 3% 2% 1% 0% -1% -2% 2013 Volume

2014 Market Growth

2015 Inflation

Source: BRC

Consumer confidence 8%

10 5 0 -5 -10 -15 -20 -25 -30 -35

6% 4% 2% 0% -2% -4% 2013

2014

General retail sales (% change) Source: Thomson Datastream, UBS

2015 Consumer confidence

2016

2017

Strategic Report

Shopping habits Shopping habits continue to evolve rapidly, with consumers expecting far greater choice and flexibility in how, when and where they shop for food, general merchandise and clothing.

Grocery market channel share 2016 – 22 % of market 100%

80%

60%

The UK grocery market remains very competitive. Convenience stores and online retail continue to show strong growth, as consumers shop more frequently across different channels and store formats. Discount food retailers continue to open significant numbers of new stores and gain market share, but at lower rates than in recent years. In line with our expectations, these trends place pressure on volumes through the supermarket format. However, we continue to expect supermarkets to remain the key channel for groceries. Within general merchandise and clothing, traditional store formats, particularly on the high street, continue to see footfall and sales declines as online participation grows. The combination of a strong online proposition and a wide variety of delivery and collection options is popular with consumers, with Click & Collect accounting for a significant and growing proportion of UK online general merchandise and clothing sales.

40%

20%

2016 Supermarket

2019F

Convenience

2022F

Discount

Online

Other

Source: Company estimates

Argos Internet sales as proportion of total sales over the last 5 years 60% 55% 50% 45%

Future retail trends Consumers will increasingly expect a seamless, flexible retail offer across all products and channels, to fulfil their orders rapidly in a location and at a time that is most convenient to them.

40% 35% 30% 2012

2013

2014

2015

2016

Addressing a changing marketplace As our customers’ lives change, so will our business. To address the changing marketplace and changing shopping patterns we have prioritised four key areas of our business where we can differentiate ourselves, grow and create value. These priorities are: to further enhance our differentiated food proposition; to grow General Merchandise and Clothing and deliver synergies by integrating Argos; to diversify and grow Sainsbury’s Bank; and to continue to cut costs and maintain our balance sheet strength. To read more about the progress we are making against these priorities please see pages 15 to 23

Consumers will increasingly expect a seamless, flexible retail offer across all products and channels, which is able to rapidly fulfil their orders in a location and at a time that is most convenient to them.”

2017

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Strategic Report

Chairman’s Letter

This year has been an important year in the history of Sainsbury’s. Our primary responsibility as a Board is to create value for shareholders in a sustainable way over the medium and long term and we have taken significant steps this year in delivering this objective.

Strategic Report

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